4 December 2006 External T.I. 2005-0162511E5 - Distribution of Assets of a Union on its Wind-Up

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: What are the tax consequences of amounts received by a union member upon the wind-up of the member's union?

Position: Generally, the disposition of the right to be a member will constitute the disposition of a capital property that has a cost base of nil and the proceeds of disposition will be included in the member's income as a capital gain.

Reasons: See above.

								2005-016251
XXXXXXXXXX 							S. Lewis
(613) 941-7239
December 4, 2006

Dear XXXXXXXXXX:

Re: The Distribution of Assets of a Union on its Wind-Up

This is in response to your letter of December 2, 2005 and acknowledges the subsequent information supplied in your letters dated May 19, 2006, and September 14, 2006, concerning the tax consequences of amounts received by a union member upon the wind-up of the member's union.

Facts

XXXXXXXXXX

You have inquired about the tax treatment of the surplus funds received by each Member of the Union as determined under the Income Tax Act (the "Act") and have requested a clearance certificate in respect of the Union.

Your Opinion

It is your view that the distribution of surplus funds upon the wind-up of the Union will result in each Member of the Union realizing a "disposition", as defined in subsection 248(1) Act, of his or her right to be a member of the Union. As a result section 38 of the Act will determine the taxable capital gain to be 1/2 of each Member's capital gain from the disposition of his or her right to be a member of the Union.

It is your view that the adjusted cost base of each Member's right in the union is nil.

You assume that the Union is still considered to be a labour organization for the purposes of paragraph 149(1)(k) of the Act.

Our Comments

Whether the Union qualifies as a labour organization for the purposes of paragraph 149(1)(k) of the Act is a question of fact. For the purposes of our comments we assume that the Union is still a labour organization.

Whether an amount received by a taxpayer is on income or capital account or is a windfall is a question of fact that is resolved based on a review of the documents and circumstance of the situation. With respect to the situation you have described, we generally agree with your analysis. Although the disposition of each Member's right to be a member of the Union is considered a disposition of capital property, the adjusted cost base of the right would be nil if the Member did not pay any specific amount to become a member of the Union (assuming no adjustments are required under section 53 of the Act). In determining the adjusted cost base, the cost of the right to be a member of the Union would not include the annual membership dues.

Further, if there are any current year membership fees, which are eligible for deduction from the Member's income pursuant to paragraph 8(1)(i) of the Act, the return of such amounts will constitute income to each Member, except to the extent that such amounts are taken into account in computing the deduction claimed under subsection 8(1). In addition, the said amounts will not be included in determining the proceeds of disposition of the Member's right to be a member of the Union for the purposes of computing a capital gain.

With respect to your request for a clearance certificate we do not issue clearance certificates from this office. However, one may be obtained by filling out Form TX19,Asking for a Clearance Certificate, and sending it to the Assistant Director, Audit, at your local Tax Services Office. Please refer to Information Circular IC-82-6R5, Clearance Certificate, for more details.

We trust that these comments will be of assistance.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch